What Happens If You Refinance a Car Loan?

Car loan refinancing involves replacing an existing auto loan with a new one. This process pays off your original loan with funds from a new loan, allowing for adjustments to the interest rate, monthly payment, or loan duration.

Understanding Car Loan Refinancing

Refinancing a car loan can be a practical financial decision. An improved credit score since financing the vehicle often makes you eligible for more favorable interest rates, reducing the overall loan cost. A decline in market interest rates can also present an opportunity to secure a lower rate than your original loan offered, even if your credit profile remains unchanged.

Refinancing is also considered when you want to modify your monthly payment. A longer loan term can decrease your monthly payment, freeing up cash flow. Conversely, a shorter loan term will increase your monthly payment but can lead to significant interest savings and faster debt payoff.

Preparing for Refinancing

Before applying, gather information about your current car loan. You will need your current lender’s name, outstanding balance, existing interest rate, payoff amount, and remaining term. Check for any prepayment penalties.

Lenders require financial documents to assess eligibility. This includes proof of income, such as recent pay stubs, W-2 forms, or tax returns if self-employed. You will also need identification, like a driver’s license, and proof of residence.

Check your credit score and obtain a copy of your credit report before applying. This helps you understand your creditworthiness and identify errors. Reviewing your credit report provides an opportunity to dispute inaccuracies, which could improve your score and lead to better loan offers.

When comparing new loan offers, consider more than just the interest rate. Evaluate the proposed loan term, any associated fees, and whether there are prepayment penalties. Refinance loan terms range from 24 to 84 months. Longer terms result in lower monthly payments but potentially higher total interest paid.

The Refinancing Application Process

After preparing documentation and evaluating offers, submit your refinance application. Many lenders offer online application portals. Some financial institutions also provide in-person options.

Once submitted, the lender will review your application. This includes performing a hard credit check to examine your credit history. The lender will also conduct a vehicle valuation to ensure it meets their requirements for age, mileage, and loan-to-value ratio.

Upon approval, you will receive a new loan agreement outlining the terms. Review this document carefully, paying close attention to the interest rate, monthly payment, and loan term. After you sign, the new lender will pay off your old loan, which takes 5 to 15 business days.

Post-Refinance Considerations

Once your new car loan is established, consider several factors. Your credit report will reflect a hard inquiry, the closure of your old loan, and the opening of the new one. A single hard inquiry results in a small, temporary dip in your credit score, but its impact diminishes within 12 months.

You will have changes in payment logistics, including a new monthly payment, revised due date, and new payment methods. Update any automatic payment arrangements to reflect the new loan details to avoid missed payments. The overall process, from application to the new loan taking effect and the old one being paid off, can range from two weeks to 30-60 days.

Transferring the vehicle’s title is an important step. The new lender will be recorded as the lienholder on your car’s title. This process is state-dependent and can take two to eight weeks, or longer, for the Department of Motor Vehicles to update records and send the new title.

Confirm your old loan has been fully closed and paid off by the new lender. Request documentation from both your previous and new lenders verifying the payoff and zero balance on your original loan. This ensures no lingering obligations remain.